Archive for September, 2011

This and That: Experts, Illegal Downloads and more…

September 29, 2011

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Trouble with Experts: CBC TV featured a documentary on how good expert predictions, especially those stated confidently in the mainstream media are (hint: not very). Unfortunately, the show did not spend much time on research findings that experts who make probabilistic and nuanced forecasts are worth listening to but the show is still worth your time.

Do not make illegal downloads: Let’s set aside the moral reasons for a minute. Michael Geist writes in The Star how movie studios are taking Canadians making illegal downloads to court and under current law statutory damages could run as high as $20,000. That kind of money can pay for a lot of DVD/Blu-Ray movie discs.

Buying the Dips: Jason Zweig writes in The Wall Street Journal that the exhortation to “buy on the dips” sounds good in theory but doesn’t stand up to analysis.

Around the blogs

Million Dollar Journey takes a look at the new Capital One Cash Back Credit Cards.

Michael James on Money explains why investing in an index is like picking the brains of the best investors out there. David Chilton explains index investing in similar terms in The Wealthy Barber Returns.

Money Smarts Blog will be travelling to the US and researched ways to get a little bit less ripped off on cell phone data roaming charges.

Blunt Bean Counter offered a list of 20 things about income taxes that baffles him. I have one item on my list: why is the child care deduction capped at $7,000 per child? And why isn’t it even adjusted for inflation?

Canadian Financial Stuff is a big fan of paying for everything with cash but points out that, in all fairness, an all-cash approach isn’t without its flaws either.

Jim Yih pointed out that compound interest is a powerful force in growing your wealth. Keep in mind though that fees, expenses, turnover, taxes and inflation are forever working against compounding.

My Own Advisor sucked up to his wife with a post on financial lessons he learned from her. Just kidding, Mark!

The Wealthy Canadian, on the other hand, sucked up to Kevin O’Leary. Enough said!

Canadian Couch Potato reviews The Smartest Portfolio You’ll Ever Own and includes a model portfolio built with ETFs from the book.

Canadian Financial DIY slams a Investment Funds Institute of Canada report for employing questionable tactics in its bid to call all ETFs “expensive”.

Dividends not only way to return cash to shareholders

September 27, 2011

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Dividends are everywhere these days. Numerous blogs cover dividend stocks and it is hard to open The Report on Business these days without running into one (if not more) columns on investing in dividend paying stocks. And judging by the number of new investors interested in dividends on the Canadian Money Forum, one would think that dividends are all there is to investing in stocks. Nothing could be further from the truth.

Investors should not lose sight of the fact that dividends are just one form of returning profits to owners. Businesses that generate profits can employ capital in other ways. Management can reinvest profits and grow the business — provided, of course, that reinvested profits generate a higher rate of return than owners can manage on their own. Management can also buy back the company’s shares, so that each remaining share can then earn a higher proportion of future profits. Though investors are not directly receiving their share when profits are reinvested or shares purchased for cancellation, they are indirectly receiving the same value through appreciation in the value of shares they hold.

Take Berkshire Hathaway (BRK-A) which has famously not paid a dime in dividends and until recently has never had a repurchase program. Long time BRK shareholders are unlikely to be crying that their holding is not paying a dividend. Neither do shareholders of Apple Inc. (AAPL) whose earnings have exploded due to the popularity of iPods, iPhones and iPads. Investing in stocks by just looking at current and past dividends is a mistake. What matters in investing is the profits that a business will generate in the future, not the dividends it paid shareholders in the past. If dividends were all there is to investing in stocks, AIG, Freddie Mac, Fannie Mae and Bear Stearns wouldn’t have gone bust and nobody would own shares of Berkshire Hathaway or Apple Inc.

Market Meltdown: 2011 Edition

September 22, 2011

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I won’t pretend that this week hasn’t been brutal. The S&P/TSX Composite dipped briefly into bear territory today when it dropped to 11,420 from its recent high of 14,329 set in April of this year. At times like these it is worth keeping in mind that we build diversified portfolios expecting that we will experience turbulent waters like the one we are currently navigating at some point in the future, although we did not know when.

Amidst all the doom and gloom, it is worth keeping in mind that well-diversified portfolios, which also have fallen in value are holding up better (depending on the actual allocation to various asset classes) due to the following reasons:

1. Bonds are doing their job of providing a ballast to the portfolio. In fact, they are doing a little bit more than that. Bond yields have fallen sharply boosting bond prices. If the stock market falls even more, some bonds can be sold to rebalance into equities.

2. We’ve discussed over and over and over again the importance of holding foreign equities without currency hedging because taking on currency risk lowers volatility. While foreign stocks have also dropped in value, the fall has been cushioned by the depreciation in the Canadian dollar primarily against the US dollar. Example: QTD VTI is down 16.4 percent in USD terms but in CAD terms the loss is 10.6 percent.

3. Surprisingly, Real Estate Income Trusts (REITs) are also holding up (at least for now). The S&P / TSX Capped REIT Index is only slightly off its recent highs. If equities drop a lot more from here and REITs drop to a lesser degree, REITs will be another source of funds for rebalancing into stocks.